Wednesday, May 19, 2010
So that's why the European policy makers were so quiet... They were coming up with a cunning plan so cunning that their foot has fallen off. Yes indeed, the Germans appear to have followed Nursie's brother's plan and decided to trim their toenails with a scythe.
*TWO-YEAR GERMAN GOVERNMENT BOND YIELD HITS RECORD LOW OF 0.422 PCT,
*TRADERS SAY LIQUIDITY DRYING UP IN BUND CASH MKT
Whether the ban is only naked or not doesn't matter. The reality is that desks have stopped making markets in Euro government bonds. The Repo market is already skittish and desk risk limits will inevitably have been cut. The inability of fixed income arbitrage funds to trade without first arranging repo is a big hit to liquidity. Stand by to hear of the next HF blow up...
It seems like the London response was to fade the sell-off: "seems overdone", "it's been done for domestic consumption, not the market" etc etc, and risk was put on. But the German bond market is the world's 2nd largest (the Bund, the world's most liquid future ) and it is hard to see how breaking it can be seen as anything but a deleveraging event. If we see Bunds start to be dumped then the last floating ship of european stability has just been torpedoed.
FRANCE NOT CONSIDERING BAN ON NAKED SHORT SELLING IN EUROPEAN DEBT, UNLIKE GERMANY